Why haven’t people been going to jail for the financial misdoings that drained the economy and necessitated huge bailouts?
The answer often given by the government is that, first, some of those actions technically violated no criminal laws, and second, civil suits lead to the recovery of more money, for the government and the victims, than criminal actions.
Not content with gentle slaps on the wrists for fiscal miscreants, however, is Judge Jed Rakoff of the U.S. District Court for the Southern District of New York (Manhattan). A specialist in securities cases, Rakoff is no respecter of persons, either when the persons are officials of thick-carpeted banks or when they are lawyers for the Securities and Exchange Commission.
Two years ago, this nemesis of Wall Street and Washington alike told the SEC where it could put a settlement proposal it had offered Bank of America, which had been called on the carpet for not giving shareholders information about $5.8 billion in bonuses it planned to pay executives of Merrill Lynch when it acquired the failing investment firm. When he learned that the SEC would have let BoA get away with having shareholders, not corporate executives, pay for the settlement, Judge Rakoff told the agency off (the $150 million penalty he eventually approved was nearly five times as large as the one originally proposed).
Now Rakoff has chewed out the SEC for a proposed settlement with Citigroup Global Markets, Inc. that would only force the bank to pay $285 million after causing investors to lose $700 million on securities that brought the bank $160 million in profit. At issue are the now-notorious CDOs (collateralized debt obligations)—mortgage-backed securities the bank said were chosen “independently” but which were actually chosen by the bank itself, which had bet on their failure; one Citigroup trader referred to this bundle of investments as “dogshit.”
And there’s more. CGM had been charged by the SEC twice in recent years with violating the same rules. But instead of hitting CGM up for violating a previous injunction against breaking those rules—which might have triggered contempt of court charges—the SEC framed the charge this time so as not to pull the legal lever of the injunction.
“How many contempt proceedings against large financial entities has the SEC brought in the past decade as a result of violations of prior consent judgments?” demanded Rakoff, a fearless slinger of scathing rhetorical questions.
Unlike the SEC, Rakoff showed zero tolerance for CGM’s misbehavior. He challenged the SEC’s common practice of letting financial services firms settle without acknowledging wrongdoing, and letting them get by with charges of negligence rather than fraud. In rejecting the SEC’s proposed settlement agreement with CGM, he wrote, “How can a securities fraud of this nature and magnitude be the result simply of negligence?”
